Beijing is making it tougher for overseas stakeholders to invest in Chinese companies. New draft data security legislation, now under review by the National People’s Congress Standing Committee, proposes new fines on firms handing over data to a foreign legal institution without Beijing’s consent.
The draft rules will “very likely become law,” said the South China Morning Post. And they raise concerns for not only public listings, but also for Chinese companies doing any business overseas.
The fines will be up to 200,000 yuan per individual and up to 1 million yuan ($154,000) per company. The SCMP also noted that the law will help Chinese firms resist foreign pressure: The new rules follow Washington’s Holding Foreign Companies Accountable Act (HFCAA) signed in December 2020 that threatens to delist certain China stocks from New York exchanges if they do not submit to PCAOB auditing. The U.S. Securities and Exchange Commission also nodded at the Act’s enforcement.
The bill aims to protect American investors from “dishonest companies,” as the bill’s sponsors, Sens. Chris Van Hollen and John Kennedy said earlier.
Kennedy has blamed “Communist China” for “using U.S. stock exchanges to exploit American workers and families—people who put their retirement and college savings in public companies.”
Another law signed by ex-President Donald Trump in 2018, the Clarifying Lawful Overseas Use of Data Act (CLOUD Act), also conflicts with Beijing’s new law. This Act allows federal law structures to access U.S.-based tech companies’ data even if stored overseas.
Indeed, Chinese fraud scandals have come to light repeatedly in U.S. markets. A recent big case, which spurred the HFCAA into passage, led to the delisting of coffee giant Luckin Coffee (OTC: LKNCY) a year ago. And while Luckin seems to be recovering after restructuring and significant internal changes, certain other U.S.-listed Chinese companies continue to be accused of fraud.
But instead of supporting its overseas-traded and internationally-operating companies by offering a compromise on audits, Beijing continues to enforce its closed-book policies. Early in 2021, China’s Ministry of Commerce imposed new restrictions on its companies in response to the HFCAA. This is despite earlier statements by China Securities Regulatory Commission's Chairman Huiman Yi, who gave hope in June by saying a way to cooperate may be found.
Still, the draft law specifies Beijing’s consent as conditional – meaning, a possibility for a green light.
The date the law would be passed has not been announced. The SCMP also notes the proposal is subject to change.